Dynatronics Corp (DYNT) 2018 Q1 法說會逐字稿

Good morning, everybody. We welcome you to the Dynatronics Corporation Investor Conference Call to review the results of our quarter ending September 30, 2017, which is the first important quarter of the fiscal year 2018.

I'm Kelvyn Cullimore Jr., Chief Executive Officer. With me is -- on the line this morning is David Wirthlin, our Chief Financial Officer. Today, we filed our 10-Q for the quarter ending September 30, 2017, and issued an earnings press release.

And before we begin, as a reminder, during the course of this call, management may make forward-looking statements regarding future events or the future financial performance of the company. Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements. We caution you that any such statements should be considered in conjunction with the disclosures, including specific risk factors and financial data, contained in the company's most recent filings with the SEC, including its most recent annual report on Form 10-K.

Today, we're going to talk specifically about the operating results from the quarter ended September 30, 2017, and the acquisition of Bird & Cronin. At the conclusion of our commentary, we'll have the operator open up the call for questions.

First, I want to bring you current on the most important event since the filing of our 10-K just over a month ago on September 27. On that last call, we announced the signing of an asset purchase agreement to acquire the assets of Bird & Cronin Inc. As planned, we closed that acquisition on October 2. As a refresher, Bird & Cronin is the Minnesota company founded in 1970 that designs and manufactures orthopedic soft goods and specialty patient care products. These products are sold in the United States and internationally under proprietary and private-label brands. Annual sales for the last 3 years have averaged approximately $24 million. For the trailing 12 months ended June 30, 2017, Bird & Cronin generated estimated pretax profit of approximately $2.1 million and adjusted EBITDA of $2.4 million. On October 6, 2017, we filed an 8-K announcing the closing of the transaction that included pro forma combined financials, and we refer you to that filing for further details on those pro formas.

The Bird & Cronin purchase price is $14.5 million to $15.5 million in cash and securities subject to adjustment. At closing, we paid $14 million in consideration, which included $4 million of our Series D preferred stock and approximately $10 million in cash less the holdback. We funded the $9.1 million cash portion of the acquisition net of the holdback with approximately $6.6 million of net proceeds from a private placement of our Series C preferred stock, which we closed on October 2, 2017, concurrent with the acquisition and with approximately $2.5 million of borrowing under our asset-based lending credit facility that we amended and funded at the end of September prior to the closing of the Bird & Cronin transaction. We modified our credit facility with the Bank of the West to provide asset-based financing to the company to be used for funding the acquisition and for operating capital. The credit facility was increased from $8 million to $11 million subject to a borrowing base calculation. The maturity date was also extended to 2 years from modification through September 30, 2019.

The Series C preferred and Series D preferred are convertible into common stock of the company automatically upon shareholder approval. Certain of the Series C preferred shareholders may elect not to convert to common, but in so doing, they lose all preferences, including dividends.

With regard to common stock underlying the preferred C and preferred D as well as the preferred C warrants, we filed a registration statement on Form S-3 on October. The registration statement went effective on October 26, 2017. At our 2017 Annual Meeting of Shareholders scheduled on November 29, 2017, we will seek shareholder approval of various matters, including the conversion of Series C preferred and Series D preferred to common stock and the approval of the issuance of the warrants.

I'm pleased to report that to date, the acquisition has gone very smoothly. Customers and employees have reacted favorably. As with the Hausmann acquisition earlier this year, we intend to operate the acquired entity with the existing management team and seek out operational and sales synergies over the coming year. Our primary goal is to create as little disruption as we can during the first year other than to assure that financial management and controls are in place and picking some of the low-hanging fruit that may exist relative to synergies.

With just over a full month of operations under our belt, we are confident that the Bird & Cronin leadership team is continuing its capable management of the operations and that the cultural fit is excellent, as anticipated.

We're pleased to also report that the acquisition of Hausmann continues to go very well. Hausmann actually had a record quarter for sales in the period ending September 30, 2017, and continues to contribute very positively to our consolidated operating results.

With these 2 acquisitions, we believe we have taken significant steps in executing our strategy to grow by acquisition. Consistent with the direction we gave in September, we will be operating at an annualized run rate of approximately $65 million to $70 million in sales. And we believe with the addition of these 2 acquisitions, we will generate positive cash flow from operations.

I'd like to give more comments in my closing remarks. But right now, I'd like to turn the time to David Wirthlin, our Chief Financial Officer, to provide a financial report on the fiscal quarter ended September 30, 2017. David?

Thanks, Kelvyn. I will provide some additional detail and color to the press release that was issued this morning. There are a couple of significant factors that had a material impact on our operating results for the quarter ended September 30, 2017: First, the consolidation of the Hausmann operating results in this first quarter of fiscal 2018 had a material impact. The comparative quarter of fiscal 2017 did not include Hausmann as it was prior to the acquisition. Second, we incurred significant legal and accounting fees in the current quarter in conjunction with acquisitions, mostly related to the acquisition of Bird & Cronin. Acquisition costs were approximately $213,000 for the quarter ended September 30, 2017. I will comment on them further when discussing SG&A costs for the quarter.

Net sales for the quarter ended September 30, 2017, increased approximately $4.7 million or 56.8% to $12.8 million compared to $8.2 million in the same quarter of the prior year. The year-over-year sales growth for the quarter came primarily from the addition of the Hausmann operation that contributed $4.7 million in net sales for the quarter. It should be noted that the $4.7 million in sales contributed by Hausmann products represented an 11.9% increase over sales in their comparative quarter last year prior to the acquisition. This is historically the best quarter for Hausmann sales, and we believe the percentage of growth experienced is indicative of a particularly strong commercial season and not necessarily indicative of what should be expected in the next several quarters.

Sales in the legacy business were approximately flat at $8.2 million in both quarters and at September 30, 2017, and 2016. However, the sales mix shifted more heavily towards higher-margin manufactured products, which were up approximately $316,000 for the quarter ended September 30, 2017. Gross profit for the quarter increased approximately $1.5 million or 55.3% to $4.3 million, representing 33.9% of sales compared to $2.8 million or 34.2% of sales for the quarter ended September 30, 2016.

The acquisition of Hausmann is the primary year-over-year difference. Hausmann operations contributed $1.6 million in gross profit for the quarter ended September 30, 2017. The year-over-year decrease in gross margin percentage to 33.9% from 34.2% was primarily attributable to the addition of Hausmann products, a change in product mix and higher freight costs.

Selling, general and administrative expenses for the quarter ended September 30, 2017, increased approximately $1.1 million or 38.3% to approximately $3.8 million compared to approximately $2.7 million in the same period of the prior year. The primary drivers of the $1.1 million increase were $950,000 from the Hausmann operation and $212,000 in additional acquisition-related expenses associated with the Bird & Cronin acquisition. Excluding the acquisition expenses, SG&A expenses in the legacy operations decreased by about $100,000.

Research and development expenses decreased 9.7% to $252,000 in the quarter ended September 30, 2017, compared to $279,000 in the same quarter of the prior year. The decrease is due to a reduction of expenses associated with new product development as certain programs are reaching completion and others are being eliminated.

Net income for the quarter ended September 30, 2017, was $199,000 compared to a net loss of $286,000 in the first quarter of the prior year. The $485,000 improvement was driven by a 55% increase in gross profit with only a 38% increase in SG&A expenses. These changes are primarily attributable to the consolidation of Hausmann operations in the quarter ended September 30, 2017.

Net income applicable to common stockholders for the quarter ended September 30, 2017, was $12,000 compared to a net loss applicable to common stockholders of $375,000 for the same quarter of the prior year. Net income or loss applicable to common stockholders included the impact of dividends to holders of the Series A preferred stock and Series B preferred stock, which were $187,000 for the quarter ended September 30, 2017, compared to $89,000 for the same quarter of fiscal 2017. The increase in dividends reflects the issuance of additional Series A preferred shares in December 2016 as we completed the Series A offering and the addition of Series B preferred shares in April 2017 in connection with the Hausmann acquisition.

We subsequently paid all of these accrued dividends by issuing shares of our common stock. Note that in some previous quarters, there has been a noncash deemed dividend associated with the issuance of preferred stock. Because we issued no preferred stock in our first quarter of 2018 or 2017, there was no deemed dividend in either period. There will be a deemed dividend that we are estimating at $530,000 accounted for in our second quarter of fiscal 2018 associated with the Series C and Series D preferred stock that we issued in connection with the acquisition of Bird & Cronin.

As previously mentioned, we increased our asset-based line of credit from $8 million to $11 million in conjunction with the Bird & Cronin transaction. On the last business day of September, we borrowed $5 million on that line to assure adequate cash on hand to close the transaction on October 2. Prior to that borrowing, our balance on the line of credit was averaging between $1.5 million and $2 million. More recently, subsequent to the closing of the transaction, our line of credit is averaging between $4 million and $4.5 million, leaving available borrowings of approximately $4.5 million based on our borrowing base of approximately $9 million.

That summarizes the operating results. Kelvyn will make some final remarks before we open for questions.

Thank you, David. The completion of the Hausmann and Bird & Cronin acquisitions have been a major focus for the last year. These acquisitions reflect our ongoing commitment to implementing our acquisition strategy.

We are very pleased with the Hausmann acquisition. The addition of Hausmann, along with the reductions in legacy SG&A expenses, resulted in more than $0.5 million in improved operating profit in the quarter compared to the same quarter last year.

We're equally excited about Bird & Cronin. As we have engaged with the management and employees of Bird & Cronin since the closing, we've been impressed with their enthusiasm upon becoming part of the Dynatronics team and their dedication to crafting excellent products, providing exemplary levels of customer service and running a profitable operation. In fact, Bird & Cronin consistently received high scorecards from their major customers relative to level of service and quality. With our broad distribution platform, we have the opportunity to expand Bird & Cronin products into the physical therapy private practice, athletic training and chiropractic markets. Likewise, many Bird & Cronin distributors have made inquiries about accessing the Dynatronics line of products. We're just beginning to explore the opportunities associated with this transaction.

Looking forward, the inclusion of Hausmann for all of fiscal 2018 and Bird & Cronin for 3 quarters of 2018 based on our $24 million average annual run rate and taking into account a conservative view of the first combined operating year, we expect consolidated revenues for our fiscal year 2018 to be in the range of $63 million to $67 million. We continue to be optimistic that the combined Dynatronics, Hausmann, Bird & Cronin business will grow top line revenue in the mid-single digits thereafter.

We expect our going-forward consolidated gross margin to be in the 33% range and sales, general and administrative costs to be about 30% of sales. The acquisition will impose some additional costs related to amortization of intangible assets and depreciation as well as increased interest to service the debt incurred to facilitate the acquisition. We expect consolidated noncash charges for fiscal 2018 to be approximately $1.25 million.

Also, in addition to the transaction expenses reported this quarter, we expect residual transaction expenses in Q2 and during the remainder of fiscal year 2018. We will provide additional details on the financial impact of Bird & Cronin after our combined quarter results are published.

I want to highlight the seasonality inherent in the combined businesses. First, Bird & Cronin revenues have not varied significantly through the year. Second, Hausmann's strongest quarter has historically been the quarter ended September 30. Third, Dynatronics' strongest quarter has traditionally been our second fiscal quarter that ends December 31. The weakest quarter for both Dynatronics and Hausmann has typically been the quarter ended March 31.

Looking at the 3 businesses combined, we will conservatively forecast $50 million to $54 million in the remaining 9 months of the year. That would average $17 million to $18 million in sales per quarter if there were no seasonality. However, we would anticipate being on the high side of the average in the quarter ended December 2017 and on the low side for the quarter ended March 31, 2018. Gross margins will also be impacted by the seasonality, with higher gross profit margins expected in the more productive quarters while still averaging around 33% gross profit margins for the year.

In summary, the addition of Hausmann, combined with the reduction in SG&A expense in the legacy operations, resulted in posting pretax profits of $199,000 despite incurring $213,000 (sic) [$212,000] in transaction-related costs during the quarter. Much of this profitability is the reflection of this quarter being the best operating quarter of the year for the Hausmann division of the company. As we add the Bird & Cronin operations in the next 3 quarters, we should continue to improve operating profits and cash flow of the company relative to the comparative periods in the prior year.

During the quarter, we also completed the consolidation of our Livermore, California distribution facility with our Utah operations. We believe the consolidation of these operations will result in cost savings of $5,000 to $8,000 per month beginning in January.

Our acquisitions of both Hausmann Industries and Bird & Cronin are important milestones in the implementation of our strategic growth plan. They demonstrate our resolve to execute on this element of our growth plan, and we will continue to identify and act on additional acquisition opportunities that will further enhance our product offering and distribution coverage and leverage our current sales network to improve gross profit margin.

We are also turning our attention to finding ways to improve operating margins within all the businesses of the company. To that end, we will be restructuring our accounting and finance department in the coming months to bring in a Corporate Controller and a financial planning and analysis manager to provide additional resources to better analyze and improve gross profit margins and reduce operating costs.

We've also recently restructured our legacy Dynatronics sales and marketing management to streamline reporting lines and supervision as well as bringing more attention and resources to the marketing efforts of the company, all of which is designed to provide sales growth, which is focused primarily on domestic sales.

Finally, we recognize the need to continue our Investor Relations efforts to better alert the market to our strategic growth objectives and performance. To that end, we will be participating in appropriate investor conferences and holding discussions with key investors and analysts. In addition, we will be looking for ways to improve our shareholder communications.

The management team at Dynatronics is committed to serving our customers with safe and effective products, building our business through organic growth and acquisitions and enhancing shareholder value. We do appreciate the support that our shareholders provide.

Jessica, we'll now open the line to take questions from those who have dialed in for the call if you would give instructions on how that's to be done.

(Operator Instructions) And we'll first go to Jeffrey Cohen.

So just a couple questions. Was there any effect upon the storms in a few of the territories last month or, I should say, 2 months ago?

The Houston area was pretty severely impacted, as everybody knows. We had several customers down there who were impacted. We saw a slight delay in some orders being delivered in the quarter because of that. Not material. But we do believe there will be some increased orders, unfortunately, from clinics that were severely damaged due to the storms there over the next few quarters.

And just to add to that, our facility there was not impacted by the flood.

That's correct.

Okay, so you may see a little bit of a spillover into Q2?

Yes, Q2, Q3 ,Q4. I'm not sure that it will be anything material that will be noticeable. But we do know there are some clinics that were severely damaged that have indicated they'll need some replacement products.

Okay, got it. Can you give us a little more color and insight into some of the cross-selling opportunities from both the acquisitions, but I guess, more recently from Bird & Cronin as far as your sales force and your distribution channels and theirs combined?

Sure. Like our approach with Hausmann, we'll work carefully and deliberately over the first year to consider opportunities that can be done with minimal disruption. Bird & Cronin has a strong presence in hospitals and institutional users. The users of the products are typically orthopedic practitioners and physical therapists. These are similar users to those we sell to in those institutions as well. However, there's an opportunity, we believe, to take the Bird & Cronin products through our channel and introduce them more aggressively in the private practice PT, athletic training, chiropractic markets. Likewise, there may be opportunities to leverage the Bird & Cronin distribution network to expand sales of the Dynatronics legacy products, as has been done with Hausmann. So some similarities there.

Okay, got it. It looked like your margins were a little stronger than we forecasted for this quarter, but yet you're still kind of indicating around the 33% range for the balance of '18. Are you being super conservative? Or are you hoping that margins will tick up slightly?

Well, we're always hoping they'll tick up slightly, and we're focusing efforts to try to drive them up. But our expectations are that they will be in the range of 33%.

Okay. And lastly, could you comment about top line and your kind of range that you're providing for the balance of 2018, $50 million to $54 million? It's sounding like that's a little bit stronger and you came in a little stronger for the quarter than we expected. Any insight there?

We're looking forward with the inclusion of Hausmann for all of fiscal 2018 and Bird & Cronin for 3 quarters and taking into account a conservative view of the first combined operating year. We expect consolidated revenues for our fiscal year 2018 -- for the full year to be in the range of $63 million to $67 million. We're still learning about seasonality with the acquired companies. We had a very good first quarter and expect sales for the rest of the year to be in the range of $50 million to $54 million, as Kelvyn mentioned, and to reflect the seasonality discussed in his comments. Overall, we expect the full year to be in line with the guidance previously given.

Okay. And then lastly, could you give us a little commentary about the M&A environment? Will most of your 2018 be focused upon digesting growth acquisitions and the cross-selling opportunities? Or you're going to continue to look for opportunities as we go forward?

Can you repeat your question you're asking, Jeff, about our M&A plans going forward? I know you said something about continuing...

Yes, yes. Will you continue to be focused upon closing the 2 and streamlining those? And what amount of effort and how focused are you on tracking on additional opportunities? And what are you seeing out there?

Okay. Yes, well, we're in very various phases of discussions with several companies. I mean, we're focusing on acquisition opportunities that will further enhance our product offering, distribution coverage and leverage our current sales network and improve our gross profit margins and cash flows. And we've executed on the 2 transactions in the calendar year and will be focusing on the more complete integration of those. But we do have others in the pipeline. And as we've said in the past, we continue to expect to complete an acquisition per calendar year on average.

And it appears there are no further questions. (Operator Instructions) And it appears there are no further questions. I'll turn the conference back over to our presenters for any additional or closing remarks.

Thank you very much, Jessica. And we appreciate those of you who have been on the call today and look forward to our next call in 3 months. If you have questions in the interim, please feel free to contact us. Thanks for being on the call today.

This concludes today's presentation. Thank you for your participation.